The rupee, which was the worst performing Asian currency last year, has appreciated over 8%Â to 49.17 per dollar since the beginning of January, recording its biggest monthly gains in the past decade. The reasons for the move up: the Reserve Bank of India’s moves to curb speculation by withdrawing the facility to cancel and rebook forward contracts, deregulation of non-resident deposit rates, and the return of capital inflows.
Foreign institutional investors have pumped in $3.24 billion in Indian equities and $3.77 billion in debt since the beginning of January. While fundamentals have shown some signs of improving -Â headline inflation slowed to 7.47% in December, industrial output rose 5.9% the same month – it was mostly sentiment. That is the case not only in India. For instance, abating concerns of China hitting a hard landing have also buoyed fund flows. But, analysts have turned cautious in the near term.
Most of the positive domestic macro data is already priced in, said Priyanka Kishore, currency strategist at Standard Chartered Bank. “The rupee may bounce back to 51 per dollar by March end because growth is expected to fall below 6.9% for FY12,†said Kishore. This was re-affirmed by the government data on Tuesday which projected GDP growth for FY12 below 7%, first time in three years compared to the 9% forecast last year.
On the global front, concerns of Greece defaulting on debt have increased as the much awaited talks with private creditors have not materialized. Also, Europe is likely to remain the biggest risk for the global economy. Europe is expected to go for a second round of three year long term refinancing program to help banks reduce their funding stress. If this does not take off like last time, it may lead to another round of risk aversion, said analysts.
Also, the old concerns of the widening current account deficit may continue to put pressure on the rupee, said AV Rajwade, forex and treasury risk consultant. The current account deficit has widened to $16.9 billion or 3.7% in the second quarter. The trade deficit has been declining gradually led by increasing remittances, but still came in at $13.2 billion in November after rising to a record $19.9 billion in October.
Espirito Santo Securities in a report said: Concerns about the high current account deficit are unlikely to fade away and a further widening of CAD for FY12 to 3.3% of GDP (up from our estimate of 2.8% earlier) cannot be ruled out due to high crude prices and moderation in exports.
Lastly, the outcome of the major state elections and the upcoming budget may also keep the rupee volatile.
Most of the positive domestic macro data is already priced in, said Priyanka Kishore, currency strategist at Standard Chartered Bank. “The rupee may bounce back to 51 per dollar by March end because growth is expected to fall below 6.9% for FY12,†said Kishore. This was re-affirmed by the government data on Tuesday which projected GDP growth for FY12 below 7%, first time in three years compared to the 9% forecast last year. On the global front, concerns of Greece defaulting on debt have increased as the much awaited talks with private creditors have not materialized. Also, Europe is likely to remain the biggest risk for the global economy. Europe is expected to go for a second round of three year long term refinancing program to help banks reduce their funding stress. If this does not take off like last time, it may lead to another round of risk aversion, said analysts. Also, the old concerns of the widening current account deficit may continue to put pressure on the rupee, said AV Rajwade, forex and treasury risk consultant. The current account deficit has widened to $16.9 billion or 3.7% in the second quarter. The trade deficit has been declining gradually led by increasing remittances, but still came in at $13.2 billion in November after rising to a record $19.9 billion in October. Espirito Santo Securities in a report said: Concerns about the high current account deficit are unlikely to fade away and a further widening of CAD for FY12 to 3.3% of GDP (up from our estimate of 2.8% earlier) cannot be ruled out due to high crude prices and moderation in exports. Lastly, the outcome of the major state elections and the upcoming budget may also keep the rupee volatile.
